Food Speculation

Shortly after the publication of the IAASTD, an internal World Bank report cited the speculation with agricultural commodities on the commodity futures exchanges, as well as the production of biofuels, as the main reason for the food price spikes in 2008. This sparked fierce controversy among scientists over the impacts of speculation with food. On the commodity futures exchanges, contracts have always been concluded on future deliveries of agricultural commodities at a prior agreed-upon price. This safeguarded both sellers and buyers against any excessive price jumps, for example those caused by the vagaries of the weather. If the fixed price was higher than the current price at the settled date, the seller benefited - if the fixed price was lower than prices are at the time the contract is settled, the buyer made a profit. Both parties were able to already calculate with the price at the time a contract was closed. Over the past couple of years, however, this has turned into a real casino for investors and speculators, who have nothing to do with wheat, soy, maize or rice. They are not interested in the commodities they speculate with; it is only important to them that the prices do not follow the same logic as the share prices on the DAX or NASDAQ, on which they speculate at the same time in order to spread their risk.

Since the 1990s, the deregulation of commodity futures trading in the United States made it possible for institutional investors to enter this market on a large scale. Since then, on the world’s most important futures exchange CBOT in Chicago, the percentage of commercial traders has decreased remarkably while the number of speculative traders has exploded. In 2002, eleven times the actual amount of wheat available was traded on the CBOT; in 2011, 73 times the actual US wheat harvest was traded. Although these speculative deals with food commodities are generally oriented towards the real situation of supply and demand, the psychology of the stock exchange and the algorithms of the computers that control the trade have led to increasingly nervous fluctuations. According to many analysts, the investors who bet on long-term increases in food prices are now having a price-driving effect.“IAASTD projections of the global food system indicate a tightening of world food markets, with increasing market concentration in a few hands and rapid growth of global re­tail chains in all developing countries, natural and physical resource scarcity, and adverse implications for food security. Real world prices of most cereals and meats are projected to increase in the coming decades, dramatically reversing past trends.“ (Synthesis, p. 22)

Betting on hunger

It is a fact that speculators get rich when rising cereal prices lead to poverty and hunger for millions of families. Hedge funds, pension funds and investment banks such as Goldman Sachs and Morgan Stanley now dominate the food commodities markets. In 2013, several European banks pulled back from speculative trading in agricultural commodities in response to public campaigns by many non-governmental organisations. Barclays - the United Kingdom’s biggest player in food speculation - announced it would no longer trade in agricultural commodities for speculative purposes. In Germany, most financial institutions gave up direct speculations with agricultural commodities with the exception of Allianz and Deutsche Bank, the latter of which still ranks among the leading speculators worldwide. In early 2014, the European Union introduced new regulations that place a limit on the number of food contracts that banks and other finance companies can hold. While NGOs welcomed this as an important first step, there are still several loopholes that remain in the regulation. In the theoretical discussion, which is strongly influenced by interested circles, no agreement has been reached. Price jumps in the global markets occurred again, with fatal consequences for the people affected.

Facts & Figures

The percentage of wheat contracts traded by commercial hedgers on the Chicago Board of Trade decreased from 88% in 1996 to 35% in 2008, meaning that 65% of wheat contracts were traded by speculative customers, such as institutional investors.

Goldman Sachs, Barclays, Deutsche Bank, JP Morgan and Morgan Stanley were the top five global investment banks involved in global commodity markets between 2010 and 2012, making an estimated £640 million ($1 billion) from speculating on food in 2012 alone. Over the period 2010-2012, they made an estimated total of £2.2 billion from trading food commodity contracts.

“The global food price crisis that occurred between 2007 and 2008 (...) had a number of causes. The initial causes related to market fundamentals, including the supply and demand for food commodities, transportation and storage costs, and an increase in the price of agricultural inputs. However, a significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble.”

The global food and financial crises of 2007 and 2008 pushed an additional 115 million people into hunger and poverty as a result of the combined impacts of rising food prices and the global economic recession.

On average, Americans spend just 6.6% of their household budget on food consumed at home; while citizens in the United Kingdom spend 9.1% on food. In countries such as Pakistan or Cameroon, where the average person spends 47.7% or 45.9% on food respectively, price spikes become a lot more noticeable.